Nelnet to Pay $55-Million to Resolve Whistle-Blower Lawsuit

Nelnet will pay $55-million to settle its share of a whistle-blower lawsuit that accuses it and several other lenders of defrauding taxpayers of more than a billion dollars in student-loan subsidies.

The settlement, which Nelnet announced late Friday, is the latest to result from a lawsuit brought by Jon H. Oberg, a former Education Department researcher, on behalf of the federal government. A federal judge ordered Nelnet and seven other student-loan companies to participate in a settlement conference last week after two of the other defendants in the case, Brazos Higher Education Service Corporation and Brazos Higher Education Authority, reached a tentative settlement agreement with Mr. Oberg.

Among the other defendants in the case is Sallie Mae, the nation's largest student-loan company. A year ago, the Education Department's inspector general issued an audit concluding that Sallie Mae overbilled the Education Department for $22.3-million in student-loan subsidies and should be required to return the money to the department.

Nelnet, which is based in Nebraska, did not admit any wrongdoing as part of Friday's settlement, and said in a statement that its "sole reason for proactively resolving the lawsuit is to eliminate all uncertainties." If the lender had lost the case, it could have been liable for three times the $407-million that it allegedly overbilled the government for interest-rate subsidies.

"While we believe the case brought by Mr. Oberg was without merit and that we would have prevailed at trial, a settlement eliminates the uncertainty, distraction, and expense of a trial," Nelnet said in the statement.

The settlement comes seven years after Mr. Oberg discovered that Nelnet and several other lenders were exploiting a loophole in a program that guaranteed a 9.5-percent return on certain loans. Mr. Oberg reported his discovery to his supervisors, but he says he was brushed off and told to work on other things.

The overpayments continued until the Education Department announced, in January 2007, that it would stop paying lenders at the highest subsidy rate until they could prove that they qualified for it. The following month, the department announced that Nelnet would be allowed to keep $278-million in overpayments but would lose out on an estimated $882-million in future federal subsidies.

At issue in the lawsuit are subsidy payments the Education Department made to student-loan companies on loans financed with tax-exempt bonds.

In the 1980s, Congress provided nonprofit lenders—those that finance their loans with tax-exempt bonds—a guaranteed rate of return of 9.5 percent to help protect them at a time when the economy was sour and the cost of making loans was soaring. Congress eliminated that guarantee in 1993 and grandfathered in existing loans.

But most nonprofit lenders and some large for-profit loan companies that have purchased nonprofit agencies maintained that government regulations allowed them to continue to receive the 9.5-percent return by using the returns on loans backed by the bonds to make new loans.

Many lenders profited by that practice, known as "recycling," but none more than Nelnet. According to a 2006 audit by the Education Department's inspector general, the lender raised the amount of loans it billed under the 9.5-percent guarantee from about $551-million in March 2003 to $3.66-billion in June 2004. During that time, students were paying an interest rate on their loans of 3.4 percent, so the government had to make up the difference. Congress permanently closed the loophole that allowed recycling in 2006.

Comments

1.atana09 - August 16, 2010 at 09:56 am

It seems that the influence of Nelnet over the federal government continues to protect them from whatever questionable tricks they use to divert money from that government. A alleged 407 million in stolen funds, all of it seemingly forgotten by handing back some (in their terms) pocket change of 55 million. And not having to admit to any malfeasance in the over billings and all the other questionable tricks. Interesting that the almost inconceivable amounts of monies that these companies have stolen can be forgiven by paying back a comparative pittance from the monies which they have stolen. Whilst at the same time, from these same companies honest student borrowers receive no such tolerance, but rather are harassed, subjected to incredible fees and have virtually no rights whatsoever...and those are the student borrowers who can pay company's such as NNC . Gods help those who cannot due to our current depression because no one else will. Apparently money talks, even if it is money stolen from the tax payers.

2.feudi - August 16, 2010 at 10:01 am

Hmmm...let's see. NELNET overbilled American taxpayers for about $407,000,000 in illegal interest subsidies, but it only has to pay back $55,000,000 of this fraud.

And we wonder why the nation is bankrupt? Corporate welfare like this is disgusting because the feds just keep letting it happen. In 2002, Tenet Healthcare committed Medicare fraud to the tune of tens of Billions of dollars. What happened? Tenet had to repay $900, all of it tax deductible...it then moved its corporate headquarters to Houston, hired Jeb Bush and Bob Kerrey as Directors, and let their CEO Jeff Barbakow walk away with about $200,000,000.

3.susanekg1 - August 16, 2010 at 12:42 pm

Sallie Mae certainly needs to be investigated further, not only for its dubious credit card offers and cash-back schemes, but also for the way it jacks up interest rates when consolidating loans. Sallie Mae, which is supposed to provide low-cost loans, not only elevates interest rates far above market levels when customers consolidate loans, it cancels existing loans with lower rates in the consolidation process. As a result, many borrowers end up paying rates that are far above prevailing levels for years on end.

My interest rate is now 6%, which might not seem that bad, but the rate on my largest outstanding loan was 3% when I stupidly decided to consolidate, not realizing that the rate would double. While I am fortunately able to draw on other cheaper loans to get out of debt sooner, my guess is that people who are most in need of relief are least able to get it. Moreover, I'm sure that these people are paying even higher rates even though the prime rate has reached historic lows. Clearly, borrowers who are most in need of relief should be given an option to consolidate at a lower rate rather than getting deeper in debt in what's supposed to be a financial aid program.

4.sunshineav - August 18, 2010 at 11:27 pm

It is truly sickening that this sort of egregious exploitation of gov't funds, meant to help students achieve higher education, can occur without any criminal or more substantial penalties. Shame on those that left the loophole open for as long as it was, as well. Whistleblower like Mr. O should be commended...I'd like to see his face/name on a stamp! Perhaps a Whistleblower line should be created by those that save the US taxpayers lots of $

5.barrysto - September 14, 2010 at 11:09 am

That's what I don't understand... Why do these companies want to scam our youth when they are the future of the nation? First universities had to stop the promotion of student credit cards and now this. The solution however should come from the parents IMO. Parents need to start teaching their kids about personal finances earlier so they don't fall in all possible traps before graduating.